One of the first and most important elements of getting on top of your finances is looking at your debts.
Having multiple loans and credit cards with different length terms, different rates and coming out of your account on different dates can be a bit overwhelming and make you feel like you don’t know where to start .
Consolidating your debts makes it much easier to manage your debts, which can eliminate a lot of stress.
This guide explains the various benefits of debt consolidation.
First of all, what is debt consolidation?
Debt consolidation means using one credit facility to pay off all your existing debts. Debt consolidation loans can come in various forms, for example, secured loans, personal loans, or even balance transfer credit cards. The right product for you depends on a number of factors such as your credit history, whether you own your home, and your income.
1. Make it easy to manage your loans
If you have multiple credit card, personal loan, and/or mail order accounts, payments for each may be taken out of your account at different times of the month. It is also likely that the parameters of each facility will differ depending on whether you are making minimum payments only, interest payments only, or principal payments.
This can make it really difficult to manage and keep track of your loans.
Consolidating your loans into one loan means that you will only have one monthly repayment, making paying off your loans a much easier and stress-free process. Since it will automatically come out of your account every month (on a pre-agreed date), you won’t have to think about it anymore or worry about missing a payment.
2. Reduce Your Monthly Expenses
Secured debt consolidation loans typically offer much lower interest rates than personal loans and credit cards.
The average rate for a credit card is around 40% APR, compared to a secured loan where average rates sit around 6% to 10% APR.
Secured loans can be availed over a longer loan tenure as compared to personal loans and credit cards which helps in reducing the monthly payment as well as reducing the interest rate you pay.
It is important to know that when you are making short term monthly savings, you can increase the amount that you have to repay in total by extending some of the loans over a longer period.
Using a debt consolidation loan calculator is the best way to estimate how much a debt consolidation loan will cost and how much you can potentially save per month.
3. Improve Your Credit Score
Over the course of a few months, having a debt consolidation loan can drastically improve your credit profile; If you manage it properly.
First, settling any credit card or loan balances will have a positive impact on your score – especially if there have been missed payments on these accounts.
Second, demonstrating that you can keep up with repayments on a secured facility will help build your overall credit profile over time.
4. More Security
Credit cards and store cards are known as revolving credit, which means there is no fixed end date. Such products, including unsecured personal loans, usually do not offer fixed rates, which means that your interest rate can increase at any time, making the loan more expensive.
Secured debt consolidation loans are set up over a fixed term with pre-agreed monthly repayments, which means you’ll have the security of knowing when the loan will be repaid. You can also get fixed interest rates on terms of up to 5 years, which means you will definitely not get a rate hike during this time.
It can help you comprehensively in budgeting and taking control of your monthly expenses.
5. Re-pledge step
Generally speaking, first charge mortgage products attract lower interest rates than second charge products. However, most first charge mortgage providers do not offer loans for debt consolidation purposes. Therefore, a second fee loan can be used to consolidate your credit card and personal loan to reduce your monthly expenses, and then after a few years you can refinance and secure your mortgage and secured loan into one product. can be consolidated.
Ultimately, there are a huge number of benefits to consolidating your debts and it can be one of the best steps you can take in terms of regaining control of your finances. However, you should always talk to a broker or financial advisor before taking any decision as they would be able to guide you in terms of the right product to choose.